Exclusions j.(5) and j.(6): Appeals Court Provides a Simple Tutorial

Author: Randy Maniloff

Decisions addressing the applicability of exclusions j.(5) and j.(6), given their often fact-intensive nature, are sometimes complex. But not MTI, Inc. v. Employers Insurance Company, No-17-6206 (10th Cir. 2019). It is simple and clearly explained. And that's why the decision could become a go-to one for courts confronting the double Js. [I just made that term up. Maybe it'll stick.]

At the outset, the facts at issue are straightforward. That helped to keep the decision simple. Western Farmers Electrical Cooperative, which owns cooling towers in Oklahoma, hired MTI to replaced corroded anchor bolts in a tower. MTI employees removed all 64 corroded anchor bolts. However, because the adhesive applicator had not yet arrived, “MTI did not immediately install new anchor bolts. Further, MTI did not provide any temporary support to ensure the stability of the tower. On the night of May 24, extremely high winds struck the tower, causing it to lean and several structural components to break. Due to the extent of the structural damage, removal and replacement of the tower was determined to be the only viable option. Although at least some internal operational equipment was not damaged, this equipment was deemed too dangerous to access and recover."

Even the procedure is simple: “WFEC demanded MTI pay the cost of removing and replacing the entire tower, which totaled over $1.4 million. MTI filed a claim for coverage with its insurer, Wausau, under the [CGL] Policy. After Wausau declined to provide coverage, MTI directly negotiated a settlement of $350,000 with WFEC. The balance of the tower replacement cost was borne by WFEC's insurer." MTI filed a coverage action seeking recoupment of its settlement amount from Wausau.

At issue before the court was the potential applicability of exclusions J(5) and J(6):

j. Damage To Property

“Property damage" to:

. . . .

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because “your work" was incorrectly performed on it. (emphasis added)

As the court noted, the key to the scope of these exclusions is the meaning of the phrase “that particular part." The court observed that these exclusions have received inconsistent treatment from courts around the country. It provided several examples on both sides. But inconsistent treatment, the court pointed out, does not mean that the language is necessarily ambiguous.

The court identified two schools of thought nationally on the interpretation of “that particular part" - narrow and broad.

Courts in the narrow camp have “determined the scope of coverage by looking to the 'distinct component parts' on which an insured conducts operations. Courts in the broad camp have held that “that particular part" could “apply to those parts of the project directly impacted by the insured party's work."

The court saw both ways as being reasonable -- but only one could apply: “Because both readings are permissible, the exclusions are facially ambiguous." At that point, the outcome is easy to predict: “Because the exclusions are ambiguous, they must be strictly and narrowly construed in a manner favorable to the insured party. . . . In this case, interpreting 'that particular part' to refer to the distinct components upon which work is performed best comports with these rules of interpretation." [Even so, the court acknowledged that it's a fact intensive and case-by case-issue: “In some instances, a larger unit will properly be considered “the particular part."]

Applying a narrow interpretation, the court held: “As applied to the facts of this case, we conclude the 'particular part' on which MTI was 'performing operations' and upon which work 'was incorrectly performed' should reasonably be understood as the anchor bolts. Those bolts constitute 'distinct component parts' of the tower[.] . . . MTI performed work incorrectly by removing them without promptly replacing them or bracing the structure. We further conclude it is objectively reasonable that MTI would expect coverage for the cost of replacing the entire tower, including all of its operational elements, given the ambiguous language of exclusions j(5) and j(6)."

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This article is reprinted with permission of its author, Randy Maniloff, as it appeared in the February 6, 2019, issue of his Coverage Opinions newsletter (Volume 8, Issue 2). Maniloff is an attorney with White and Williams, LLP located in Philadelphia, PA. Visit Coverage Opinions here: www.coverageopinions.info.